Thursday, September 3, 2009

Which Legal Structure Is the Right One for My Business?


There are several different things to think about when starting a business. One very important decision is what legal structure you want to operate under. It will dictate lots of other things about your business...especially when it comes to money and taxes.

There are several different ways to set-up your business. Each has their own set of rules, advantages, and disadvantages. Here is a quick overview of business structures to consider.

* Sole proprietorship: You should only have this type of business if it is just you that is running your business and is responsible for its success or failure. That doesn’t mean you can’t hire people to do different parts of your business, but if something goes wrong, or someone else doesn’t hold their end of the bargain, you will be solely responsible for the business and business losses, including putting your personal assets at risk.

* Partnership: Unlike a sole proprietor, any good or bad consequences are taken by both partners, not just you. This allows each partner to be equally responsible for the success of the business. However, this also means that if someone else doesn’t put in an equal amount of effort or makes a mistake you are still responsible. There are limited liability partnerships, or LLPs that decrease this risk.

* Corporation: A corporation is generally what we think of when we hear big business. This is a company that operates separately from any specific person. It pays its own taxes and no one specific is personally financially responsible. This arrangement is beneficial, but difficult and expensive to start and maintain.

* LLC, or Limited Liability Company/Corporation: This is a newer type of business structure, but it is becoming more and more popular. This is a hybrid between a partnership and a corporation. It offers some of the financial protection of a corporation, but is much easier to set up and maintain. It is ideal for smaller businesses that are looking for an opportunity to expand. It also only needs one person to start, unlike a partnership, but does require other people to be involved with running and maintaining the company.

Choosing the right set-up depends on how many people are involved, how much trust you are willing to put in each other, the amount of risk involved in the business and how much you are willing to take responsibility for, as well as the financial and time resources you are able to devote to the company. It may also depend on the laws surrounding these arrangements, which can vary depending on where you live.

When starting a small business on your own, a sole proprietorship is generally the way to go; however, if you have more resources, looking into a limited liability arrangement will help protect your legal and financial situation in the future.

Choosing your business structure is not an easy decision. It takes time and requires careful planning. It’s also a good idea to get some help. When forming a partnership, corporation, or LLC, each person involved should secure their own advice from an accountant, attorney, or both. This will help ensure that everyone is being represented fairly and knows what is going on in the business relationship.

Aspire to Plan!


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